Why This Bull Market Feels Familiar

It Has Lots in Common With the '90s Rally, but With Stronger Headwinds

Stock investors should brush up on their Macarena skills and then sit down for a few episodes of "Seinfeld." These days, it's feeling a lot like the 1990s, some say.

For many investors, that brings to mind the overheated stock market of the tech bubble that spread in 1999, only to burst in early 2000.

But there were nine more years to the decade. The middle of the 1990s in particular was especially good for investors, with stocks posting big gains despite a slow-growth economy dubbed the "jobless recovery."

"While hoping the finale doesn't also repeat, we are seeing a lot of similarities between today's environment and the mid-1990s," says
Liz Ann Sonders,
chief investment strategist at Charles Schwab.

Recently, stocks have struggled to extend the big rally of 2013, when the S&P 500 index rose nearly 30%. So far this year, the S&P is up 0.89%, and some say the bull market is showing signs of fatigue.

The tech-heavy
Nasdaq
Composite has been the scene of most of the recent carnage. It's lost 6% since its March 5 high. The Dow Jones Industrial Average, by contrast, is down 1% since its record set on Dec. 31.

Back in 1994, stocks stumbled but then quickly recovered as the Federal Reserve raised interest rates. And in another similarity to today's backdrop, Washington was bitterly divided. Partisan fighting led to federal-government shutdowns in 1995 and 1996. But, as has been the case lately, the federal budget deficit narrowed.

There are, of course, big differences between today's market and that of the 90s, most important the lingering damage from the financial crisis. That's led to an unprecedented effort by the Fed to keep short-term interest rates at essentially zero and has added considerable uncertainty to the outlook.

But many investors today seem to have forgotten—or simply weren't around for—the big bull market of the 1990s. During the entire decade, there wasn't a single bear market, a 20% slide in stocks from a peak.

From 1990 through 1999—when the Internet stock bubble began to dominate the market—the S&P 500 more than tripled.

Much of those gains came in the years from 1995 through the end of 1998, when the S&P 500 rose an average of 28% a year. The stock market became dominated by a "buy the dip" mentality. Optimistic investors saw every downturn as an opportunity to buy more stocks—until the spring of 2000, when the dip turned into a crash.

More

"One similarity, which is also a lesson for today, is that there weren't many pullbacks," says
Robert Doll,
chief equity strategist at Nuveen Asset Management. Another dynamic, Mr. Doll recalls, is that before the tech bubble, leadership of the rally would rotate among sectors. That's something that has been the case of late, he says. A concern among some investors is that it will be difficult for the rally to continue, with valuations having risen sharply over the past year.

In the mid-1990s, however, valuations were only slightly higher. From 1995 through the end of 1997, stocks in the S&P 500 traded at an average of 17.9 times the previous 12 months' earnings, according to Standard & Poor's. Today, the S&P 500 is at 17.4 times trailing earnings.

Ms. Sonders says the economic backdrop of the mid-1990s echoes today's. "Like then, we are in a post-financial-crisis period accompanied by a 'jobless,' disinflationary recovery," she says.

Of course, today's economy is facing more significant headwinds than those that followed the savings-and-loan crisis of late 1980s. The July 1990-March 1991 recession was relatively shallow and short.

But like today, in the mid-1990s investors worried about the slow pace of employment growth and the prevalence of low-paying jobs among those positions being created.

"While the recession in the early '90s wasn't steep…we did see a very slow recovery," says
Lewis Piantedosi,
co-manager of the $146 million
Eaton Vance
Large-Cap Growth Fund. "What we have seen these last couple of years is an economy…that takes two steps up and one step back."

Aside from the 1997-98 Asian financial crisis, which sent a scare through global financial markets, the main hiccup for stocks came in 1994.

The cause was a jump in bond yields as the Federal Reserve began to raise interest rates faster than had been expected. From the end of January 1994 through the end of June, the S&P 500 lost 7.8%.

But that didn't end the bull market. "If rates go up in line with improvement in the economy, that's a good market environment for stocks," says Ms. Sonders.

The lesson for investors today is that rising rates may pose a hurdle, but don't have to mean the end of a bull market, says Mr. Piantedosi. "Once the Fed did what they needed to do with rates, we took off from there," he says.

Still, Fed policy in the 1990s looked nothing like today's stance at the Fed.

And there are other headwinds today that didn't exist in the 1990s, Ms. Sonders notes. Profit margins are higher today, making it harder to generate profit gains. And economically, income inequality is greater now than two decades ago.

Another difference from the 1990s is that many stock investors are still wary after the bear markets of the early 2000s and the financial crisis.

Ultimately, whether stocks continue their bull market will depend on the fundamentals, not just similar charts, says Mr. Doll. "In order to get continued decent markets, I do think we need to see some more improvement in the economy and earnings growth," he says. "But I think we'll get it."

The valuation comparison is not even close - the Shiller PE ratio was 44 in late 1999 (and in the 30's most of the 1990's) - as of Thursday we are at 25.36.Furthermore, while the S&P500 and Dow are at new highs, the tech-heavy NASDAQ is 500 or so points away from it's all time high 15yrs ago.

Strange that there is no mention about the fact that the largest component of the Baby Boomers were in their peak consuming and earnings years in the 1990's. So there was a huge demographic tailwind for the economy and there was a huge influx of tax $'s from payroll taxes. Now those same Baby Boomers will begin to put major stress on Federal budgets as they draw on Medicare and SS benefits.

In addition, while PE's may be similar, profit margins today are at all time highs which are probably not sustainable so there may be headwinds to both top and bottm line profit growth from these levels.

"Deficits don't matter" - so we will ADD TO our debt so it is $17+ trillion worth of Treasuries and giggle with glee that our annual Federal Deficit is only $600+ billion - - because BUSH AND CHENEY were dopes for saying "Deficits don't matter" (the current Administration and Fed debts tower above levels during the Bush years - but Bush/Cheney were the irresponsible ones???).

The big difference between now and the mid-90's is that we don't have a economy able to act without Fed stimulus (back then we had Y2K and other new Tech stuff to buy). The Fed has kept the Fed Funds rate below .5% for almost 7 years now - and it never tripled it's balance sheet in additional stimulus either. When has this ever occurred before?

Honestly people - if you are missing these points and still blaming Bush you have no one but yourselves to blame.

A large difference overlooked in this piece is that the decline of the US in demographic, economic, and geopolitical terms has progressed to a much more advanced degree than was possible in the immediate aftermath of Reagan's era and the resultant victory in the Cold War, and before the full impact of the leftward drift of the US could be felt.

For many investors, that brings to mind the overheated stock market of the tech bubble that spread in 1999, only to burst in early 2000. But there were nine more years to the decade. The middle of the 1990s in particular was especially good for investors, with stocks posting big gains despite a slow-growth economy dubbed the "jobless recovery."_______________________________________________________________

The lesson of the nineties was not just that it ended with the tech bubble bursting in 2000. The lesson was that the gains of the nineties were based on false accounting data. The run up gave the illusion of riches, but when the music stopped, the chairs disappeared and we all understood we'd been duped. And to make matters worse, we'd paid high taxes based on the false gains.

Someone needs to do some fact checking before they post articles. The whole notion of a jobless recovery during the nineties is completely inaccurate. More than 10 million jobs were created during each of President Clinton's terms. Under President Obama, the number is about 2 million for each term. The 90s economy was way more robust than today's. This article appears to be a mindless justification for the Fed QE-induced stock rally, which will end in tears just like 2008.

During the 90s we had explosive jobs growth not a jobless recovery. 22 million jobs were created under Clinton and much credit for this must go to the Reagan boom. Reagan created the pro-business/capital environment that spawned the tech boom. By the mid 90's there would be 5000 new corporations, that would become job and revenue machines.

No, the term "jobless recovery" was widely used in the early 90s, particularly when the blame could be pinned on Republicans. As with all recessions and other forms of both economic and geopolitical difficulty, they are heavily reported when doing so is beneficial to the Democrat Party and miraculously disappear from the information stream fed to the public when it is not beneficial to the Party. It is no different than the homeless crisis, which will inevitably return on January 20 of any year in which a Republican takes the Presidential oath of office.

that sounds like you just needed some better financial advice back when if that was even an option to lose your retirement regardless of the president who was TRASH that you mentioned, NY generates more money than New Orleans Period.

Three things happened under President Clinton that boosted the economy that won't happen under Obama:

-The last of the S&L bailout money was spent (100b+) during Clinton's first year in office.-Newt Gingrich took control of the House and ended 40 continuous years of Demosocialist control and deficits and balanced the budget the following year.-Ronald Regan won the cold war and enabled a huge draw down of the military

Obama has set records for debt and deficit spending, is in the process of resurrecting the Cold War and has put in place Democratic Party economic policies of hate & envy to punish the hard working and successful. His socialist policies are having the same effect that they did for FDR in extending the Depression and in working the economic miricles in Cuba, North Korea and Venezuela.

Still blaming Bush! What was Unemployment under Bush? Do u believe in the 6.5%? More like 20%. BHO with his distribution of wealth the rich have gotten richer. We have had 0% interest under BHO and still a weak recovery .

You mean the 9/11 rundown followed by the Bush run up followed by the Harry Reid, Nancy Pelosi run DOWN.If you recall Bush was calling for investigation into Fannie and Freddie while Barnie Frank said everything was OK.

Sell everything once you retire? One could be retired for several decades. I prefer owning good companies in healthy economies, and markets that reflect their fair value. Be patient and wait for these conditions when they are not present.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.